4 things I learnt researching business services rollups

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Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.

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As we wrap up our Business Services marathon, let’s take stock of what we have learnt. 

Over the last year, we have deconstructed M&A strategies in industries as diverse as fire safety; emergency home repairs; photovoltaic installation; recruitment; accounting; Atlassian and ServiceNow partners; and even green landscaping.

After several dozen interviews and hundreds of hours spent poring over corporate filings, four common themes have emerged:    

1. Market fundamentals trump market size

2. Don't neglect integration

3. Scale through partnerships

4. Lock in the founders

Theme #1: Market fundamentals trump market size  

The biggest fallacy in the rollup world right now is that you should go after the biggest TAMs. The appeal stems from the apparent ease of building scale in huge, fragmented markets not (yet) swarming with consolidators. 

Moreover, the incremental rollup founder hails from either a tech or a professional services background (investment banking, consulting, or PE/VC). Having worked in both, I can see why so many founders view rollups through the “equity story” lens - rather than the “credit story” lens. 

• The Equity Story lens: how many companies can I buy, and how quickly?

• The Credit Story lens: how much will I lose at an individual asset level when things go south?

One manifestation of this fallacy is spending too much time on fundraising, at the expense of primary market research and meetings with business owners.  

The limitations of this approach are laid bare when any the following events happen:

• Regulations change

• Founders depart

• Clients depart (or are stolen)

• Debt covenants are breached

• There is recession

Instead, ask yourself these two questions. What is the most defensible combination of geography + vertical to get started in? And based on that, do I even need external funding?

As we argued in a recent article, there are still industries where the entry (equity) ticket is sufficiently low to go it alone in the beginning, provided you are early enough. Consider Adaptavist, the London based rollup of “Atlassian installers”, which grew to $400M+ revenue through M&A, while the founder retained 95% (link to our deep dive).     

When deciding on the vertical, use this checklist: 

1. How much of the client spend is recurring / non-discretionary? What are the drivers? 

2. How often do clients switch vendors, and for what reasons?

3. What is the degree of price elasticity? If prices increase by 20%, will anyone notice?

4. How far can I go on consolidating market X without triggering public scrutiny or anti-trust concerns? 

Bottom line: start in a small, highly defensible market and gradually expand to adjacent verticals and geographies. 

Need more proof? Sweden (population: 10 million) alone has c.30 listed serial acquirers, ranging from $500M+ EBITA behemoths like LIFCO (read our deep-dive) to newer, niche players like Norva24 (underground communications maintenance) and Green Landscaping Group. A landscaping rollup in a small country notorious for long, frigid winters sounds crazy - until you discover this is a $40M+ EBITA business (link to our deep dive).      

Speaking of which: the RollUpEurope team will be in Stockholm 🇸🇪 on 17-18 March for the Redeye Serial Acquirers Conference. We look forward to meeting dozens of rollups, from industry veterans like Bergman & Beving and Indutrade to up-and-coming firms like Astra and Tern Capital (full schedule here).    

Get your ticket today! 

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Theme #2: Don't neglect integration

The decentralised HoldCo playbook is of little use if you plan on exiting to PE in 3-5 years’ time. PE is attracted to buy & build stories with demonstrable synergies. These synergies don't “just happen”. So many dealmaker founders relish the origination and negotiation aspects, but abhor integration. A grave mistake!

Let’s take revenue management. Don't have a unified, robust CRM? You will struggle to keep tabs on receivables. Working capital goes up - especially after price hikes. Cash flow dries up… The business model quickly shifts from asset-light to asset-heavy! The emergency repairs giant HomeServe had almost gone bust - twice - for precisely that reason.   

Ditto with route optimisation i.e. being able to consistently cram engineers’ schedules with client appointments. Not possible without a unified CRM and/or ERP system. 

Herein lies a dilemma. Integration is essential. However, integration “by the book” is costly. It diverts resources away from deal origination. The acquired businesses may experience a temporary (2-3 years) margin dip as you implement best practices. Good luck if you need to exit partway. 

Here is a suggestion. Develop a two-step integration playbook: 

1. Step 1: develop common practices that do not require a unified tech stack, Constellation Software style. Sharing of best practices like 100% contribution margin initiatives. Working capital teach-ins. Building a bench of successor CEOs.  

2. Step 2: map out the heavy lifting initiatives (e.g. unified ERP) and demonstrate progress at the time of sale.

Theme #3: Scale through partnerships

When screening targets for my HoldCo Baltic Family Capital, I tend to pass on high-churn businesses. Nor do I like declining businesses that “just need more sales $ to find new customers”. 

Why? 

Many business services verticals are characterised by a combination of low churn and low organic growth. In this environment, new customer acquisition is a zero-sum game. Moreover, newly added customers tend to have lower lifetime value than the installed user base due to their propensity to seek bargains in the first place. 

Which isn't to say you shouldn't invest in sales effort. But do it the smart way, through partnerships. For HomeServe, the biggest drivers of new business are water and electrical utilities. For fire safety rollups, insurers. Lock up these partners before competition does!

Another partnership angle to explore is in financial services. HomeServe struck gold after pivoting from a profitable but cash haemorrhaging plumber shop to an insurance broker (with a repairs franchise intentionally run at break-even). Where equipment purchase is involved, offer financing. 

Seek partnerships that:

• Bring asset-light revenue streams: collect sales commissions on origination insurance and lending opportunities for partners 

• Create negative working capital: get paid upfront by e.g. writing insurance policies 

• Reduce cost of sales by internalising payment processing (ClearCourse-style) or, in the case of Teamshares, the whole finance stack

Be careful though: stepping into regulated activities elevates risk. At one point, HomeServe was fined £31M by the UK financial regulator for “widespread failings” related to boiler insurance mis-selling. Specifically, HomeServe was found to have overcharged customers; incentivised employees to close complaints early, prior to redress; as well as “failed to explain the comparative price and coverage” to customers. 

Theme #4: Lock in the founders

No matter what, keep the founders on your side. 

You may not think much of their outdated business practices. And yet, their know-how and relationships exceed yours by a country mile. Hard cash aside, how does one keep the founders engaged for as long as possible? 

Give the founders these 3 things:

• The resources and the motivation to keep building by turning acquisitions into platforms. 1komma5°, the German photovoltaic (solar) installation rollup, has perfected this playbook. In 2021, it acquired Bode & Stephan, a regional solar installer. According to this article, 3 years later, Bode & Stephan grew the number of locations from 1 to 3, and the team from 35 to 120

• The respect they seek. Key to Lineage Inc.’s ability to scale from $0 to $20B valuation was a corporate identity that - at least visually - preserves the heritage of family businesses. The name is “Lineage”. The logo is a shield. The retired owners get to hang out on advisory boards, and to serve as your brand ambassadors 

• The financial carrot. Back to the 1komma5° example. It paid an estimated 7x for the Danish PV installation market leader Visolex. Not a lot for a profitable business growing at a double-digit rate. The kicker? The 3-year earnout worth 4-5x more than the initial payment, linked both to Visolex KPIs and the parent’s exit   

Summary

• Market fundamentals trump size. Don't worry about scale. Focus on defensibility i.e. “credit case”. Sweden's thriving landscape of niche rollups proves TAM obsession is misplaced.

• Integration matters. Consider a two-phase playbook that balances quick wins (pricing, best practices sharing) with deeper tech consolidation to demonstrate synergies for PE exits.

• Strategic partnerships are gold. Target partnerships that deliver asset-light revenue, negative working capital, and reduced sales costs - but beware regulatory risks inherent in embedded finance.

• Keep the founders close. If they want to keep going, give them the resources - and structure earnouts tied to both business unit performance and parent exits. If they want to retire, respect their legacy and give them opportunities to serve as your brand ambassadors.